Most long-term sentiment measures have subsided in recent weeks, but I believe that most people who are still in the markets are bullish on dips while those out of the market won't be getting back in anytime soon. Underlying this bullish bias are a few things. Most people believe the Fed controls market interest rates. Extensive study by Tim Woods and others shows exactly the opposite, although the Fed does its best to appear in control. Most people believe the Fed controls the stock market, and, although a lot of factors including the Fed can have short-term effects, it has likewise been proven that the Fed has had no higher success rate than the market itself and probably just exacerbates the volatility and length of market action. Most people believe that the Fed can QE forever, but physics, mathematics and monetary history prove beyond a shadow of a doubt that every action has a counter-posing reaction and currency devaluation ultimately ends in disaster. Of course, the exact timing and reactions vary, but, if the markets believe either risk or inflation have bottomed, then rates are going up and the Fed will have to follow. Yes, rates have risen fast in the last 2 months, so a breather should be expected soon, but similar sudden rate rises in recent years have proven that some damage has already been done and we are at 30+ year lows. So, smart money should and probably has started to position for the next 5 or 10+ years in which rates have little room to go lower. A recession could lead to new lows in rates, but patient traders know a turn is occurring in the grand scheme of things. And, that's not good for stocks unless you think economic growth is accelerating. Here is an article that embodies what I believe most traders feel.
http://www.zerohedge.com/contributed/2013-06-16/don%E2%80%99t-fear-taper
ES futures are up 6+. The 2 more bearish scenarios are not eliminated until SPX 1641 and the downtrend line is not broken until 1635-1638+ Monday morning.
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Current SPX Position: Long at 1622
Next Action: Stop and go short at 1621.70
System Score: 5.5=Neutral=Trend Score + Turn Score=4+1.5
Proposed New Score: 50%=Neutral=Trend Score + Turn Score=16+34
Both scores have turned neutral. The System will go short if 4hr support at 1621.71 is broken. The System has now profited 301pts (21%) unleveraged while being invested about 80% of the time since its official inception on August 21st when SPX stood at 1418. SPX is 209pts higher. The System appears to be on target for a 20-30% annual unleveraged profit with a 50-60% win rate, but there are still 2+ months to go and volatility appears to be returning.
Last weekend, I gave 10 reasons why 1600ish would be retested and likely broken to 1530-1550, and I detailed how the technicals were setup for the bears to take charge through Wednesday. Bears took advantage of the opportunity and retested the uptrend line just above 1600 again. That line will be just below 1615 early this week, and it could come into play again. Bears once again have a chance to take charge for a couple days...not as good as last week. The best technical setup for bears would be some consolidation in the 1620s or low 1630s on Monday followed by a breakdown Monday afternoon and Tuesday, but the market tends to go sideways-to-up into Fed announcements so that would be unusual.
I added a chart below that outlines 4 rough possibilities for the next 1-2 weeks. The red option is a continued B wave triangle into the Fed announcement Wednesday +/-. The blue option falls in line with a 3-3-5 flat from 1598 that should lead to a fast drop probably breaking down before the Fed announcement. The black option is a double zigzag up from 1598 with one more leg up expected to 1549+ into the Fed announcement. And, the yellow option treats 1598 as the bottom with new highs in the weeks ahead. I give the latter bullish option a small 10% chance. I give the other 3 bearish options a 30% chance each due to the reasons I detailed last weekend. The 2 likeliest targets are 1575ish and 1530-1550ish with a confluence of events on June 19-21 and the 1st week of July. Breaking 1641 or 1608 would eliminate 2 of the 4 scenarios. Good fortune.
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